• D/G to NEUTRAL from Buy, new DDM-derived MYR1.00 TP from MYR1.02, 4% upside with c.8% FY22F yield. 1Q22 results are in line. Sentral REIT’s occupancy rate dropped to 86% from 90% in 4Q21 after the anchor tenant in Wisma Technip moved out while another tenant at QB3- BMW shuttered operations. As we are wary over the risk of non-renewal with tenants reconsolidating their operations, we expect rental reversions to remain flat as management focuses on maintaining its occupancy rate.

• Sentral REIT’s 1Q22 earnings of MYR20.4m (+7% QoQ, -1.6% YoY) are in line with expectations at 25-24% of our and Street full-year estimates. Revenue dropped slightly (-3% QoQ, -4% YoY) due to lower contributions from Wisma Technip and QB3-BMW following the lease expiries of key tenants in both buildings. On a positive note, management guided that the REIT is no longer expecting to grant rental rebates in FY22 following the broader economic recovery in the country.

• Occupancy rate dropped to 86%. Sentral REIT’s blended occupancy rate dropped from 90% to 86% in the previous quarter. The anchor tenant in Wisma Technip, which had been progressively moving out, completely reconsolidated its operations to another building in the quarter, leaving the building’s current occupancy level at only 50%. In addition, a key tenant’s tenure in QB3-BMW also ended, causing the drop in the blended occupancy rate. We are cautious on the risk of occupancy being less stable this year, as tenants re-evaluate their working arrangements and due to the incoming supply of office space intensifying the competition in the market. That said, its strategically located prime office buildings – such as Platinum Sentral and Menara Shell – should remain competitive for the REIT.

• 28% of NLA due for renewal in FY22. Leases up for expiry in 1Q22 had a 56% renewal rate. Management guided that rental reversions are likely to remain flattish in FY22, while we also remain cautious of the possibility of reversions dipping into negative territory, with the REIT focused on retaining tenants. To recap, over 30% of the leases up for expiry in FY21 were not renewed.

• Cut to NEUTRAL, with a lower TP of MYR1.00. We lower our FY22 earnings forecast by 2% after adjusting our occupancy rate assumptions. We also downgrade our call with a lower TP of MYR1.00 as we also adjust our cost of equity assumption – this is in view of the recent interest rate hike. Our TP has a 0% ESG premium or discount applied, since its ESG score of 3.0 is in line with the country median.

Source: RHB Research - 13 May 2022